Negative Bill Auction Yields Would Avoid ‘Grab-a-Thon,’ CRT Says

Feb. 1 (Bloomberg) -- Letting investors buy short-term
bills with negative yields at auction would make the market more
efficient, according to CRT Capital Group LLC.

The Treasury Borrowing Advisory Committee of the Securities
Industry and Financial Markets Association unanimously
recommended that the government allow for its auctions of bills
to price at negative yields “as soon as logistically
practical,” according to the group’s report yesterday to
Treasury Secretary Timothy F. Geithner, released today.

Investors bid a record 9.07 times the $30 billion in
four-week bills sold by the Treasury Department on Dec. 20 at
zero yield in one of 12 auctions since the beginning of
September at which investors paid the full face value to own the
shortest-maturity U.S. government debt. The average ratio of
bids to debt sold, known as the bid-to-cover ratio, was 6.01 at
the past 10 offerings, with the yield averaging 0.011 percent.

“Negative yields is not a new concept to the Treasury
market,” David Ader, head of U.S. government bond strategy at
CRT in Stamford, Connecticut, said in a telephone interview.
“They’re saying do it effectively and efficiently as opposed to
having a grab-a-thon and a hoarded auction.”

Three-month bills were sold at a record low yield of 0.005
percent on Dec. 19, Dec. 5 and Nov. 7, while an auction of
six-month bills on Sept. 19 produced a record low yield of 0.03
percent. Bill yields traded as low as negative 0.09 percent for
four-week securities and negative 0.04 percent for three-month
bills, both in December 2008. In August, the yield on each
declined to negative 0.03 percent.

Negative TIPS Yield

The government sold $15 billion of 10-year Treasury
Inflation Protected Securities at a negative yield for the first
time in January. Holders of that debt may earn positive returns
if inflation exceeds the premium paid above the face value of
the securities. Buyers of bills get only the repayment of the
security at face value, regardless of the price at which the
securities are sold.

The negative yields reflect investor willingness to pay to
use the government as a “safe deposit box” that will ensure
the return of principal, according to Ader.

“This is recognizing something that the private sector has
already initiated” by banks including Bank of New York Mellon
Corp., which has charged depositors to hold funds, Ader said.

The 13-member committee, which includes representatives
from five primary dealer firms as well as investment companies
including BlackRock Inc. and Pacific Investment Management Co.,
said “that flooring interest rates at zero, or capping issuance
proceeds at par, was prohibiting proper market function.”

“You have to adapt to where you are,” said George
Goncalves, head of interest-rate strategy at Nomura Holdings
Inc., one of 21 primary dealers that trade directly with the
Federal Reserve. “It does liberate those that are participating
in the auction not to be constrained by the negative rate.”